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ANALYSIS

Rising costs drag oil and gas into factory age

PERTH, March 3, 2013

By Andrew Callus and Rebekah Kebede

 

Oil engineering consultant Steve earns 550,000 Australian dollars ($560,000) a year and is seeing new graduates signed up for six-figure salaries.
 
These pay rates, along with other rising costs the oil industry cannot control, are sharpening its focus on mass production methods, clever supply deals and investment in innovation.
 
"For oil and gas executives, the need for operational excellence has never been greater," says industry consultants Bain & Co in a March 1 study on costs.
 
"Exploration, development and production costs are rising ... Activity levels are also increasing, causing sector inflation. A shortage of technical talent and capability has bid up the cost of employees and services even further."
 
Australia, where 39-year old New Zealander Steve works as a drilling specialist for an international oil company, is one of the industry's inflation hotspots.
 
Although less rampant than a few years ago, costs are rising at over 10 percent a year there, and at similar rates in Canada's oil sands regions, according to a report by analysts Wood Mackenzie. Annual cost increases of 5 to 10 percent are also the norm onshore and offshore in Latin America, in sub-Saharan deepwater, the North Sea and Russia.
 
Even onshore in the United States, a boom in development of so-called tight oil is outweighing the impact of a glut of gas capacity. Only in the Middle East and North Africa are costs flat, and nowhere are costs falling.
 
Royal Dutch/Shell and its Chinese partners China National Petroleum Corp (CNPC) are addressing costs head on in one of the hottest areas of the oil and gas industry - land-based shale gas and coal bed methane (CBM).
 
In this type of extraction, thousands of wells get drilled over a period of years. Traditionally, a costly, complex, multifunctional rig sits over each drill site along with a crew that will include specialists in the various skills required for different stages.
 
Shell and CNPC's Sirius project, aimed initially at Shell's Arrow CBM acreage in Australia but also at tight gas formations in China, tries a different approach, one that Shell's Projects & Technology Director, Matthias Bichsel, describes as "more akin to a factory production line".
 
After the appraisal stage, relatively simple, specialised, truck-mounted rigs drill a top hole - the first stage of development drilling. A fleet carrying the next-stage rigs arrives behind them to drill into the reservoir. The well completion rigs arrive after that, and automation and computer-driven directional drilling and hydraulic fracturing techniques are applied, too. Shell has plans for a fleet of 50 rigs.
 
Arrow is still waiting, largely for cost reasons, for a final investment decision, but it is particularly well suited to the production line approach, because it is likely to drill some 10,000 wells, all of similar type and depth.
 
"It's a combination not just of creating a manufacturing mindset but of adding technology to it to make that process even slicker and leaner," Bichsel told Reuters in an interview. "It's creating a conveyer belt that allows you to do the whole thing."
 
Shell is not alone finding ways to squeeze out costs through innovation and efficiency improvement.
 
In the United States, where the gas price has collapsed below cost for some producers, innovation is becoming a simple matter of survival, and there is no sign it is slowing down.
 
French drill-pipe provider Vallourec's fourth quarter 2012 pipe sales remained strong in the US despite a 5 percent decline in the rig count there. This, it said, was because the wells-drilled-per-rig ratio rose, and the length of lateral pipes used in horizontal wells increased.
 
US oil services group Baker Hughes told analysts last month that US drilling efficiency increased by 15 percent in 2012, and that the largest players would squeeze out a further 10 percent improvement this year.
 
GIANTS OF PREFABRICATION
 
Although the scale of equipment required for oil and gas projects can be huge, and is getting bigger, prefabrication is increasingly widely used, in part to avoid concentrating demand for welders and pushing up their pay rates.
 
Faced with the fierce cost of doing business in Australia, UK-based BG is having 80 LNG modules - pieces of steelwork as much as 10 storeys high, 75 metres long and weighing 2,500 tonnes - built in Thailand by Bechtel Oil, Gas & Chemicals Inc for its QCLNG project on Curtis Island in Queensland.
 
The first of these arrived in August last year. In total, Bechtel has secured orders for some 260 modules from QCLNG and two other LNG projects in the region.
 
Back in Shell's camp, the company has used its financial firepower to develop a new class of offshore drillships with rig specialist Noble Corp. A handful of these "Bully" and "Globetrotter" rigs are already in operation.
 
In an unusual departure for an international oil company, Shell has helped finance their development and part-owns some of them. Bichsel believes this approach has forced a step-change in rig design that might not otherwise have happened.
 
"They're smaller, they're cheaper to run, and they're demonstrating that you can do things faster," said Bichsel. "If you pay a million dollars per day for a (contracted) rig, then if you can shave 10 or 20 percent off your time to drill a well, that's a heck of a lot of money that you can actually save."
 
Steve, who did not want to give his full name, is based in Perth in Western Australia, at the leading edge of industry cost inflation, where a strong currency combines with high standards of living and a tight resource industry labour market.
 
The trend that has multiplied his salary 16-fold in U.S. dollar terms since he started as an employee engineer in 1999 shows little sign of abating.
 
"The operators themselves are creating the cost pressures by offering higher and higher wages to get the best people," he said. "There's a lot of movement around Perth - people going from Woodside to Chevron and to the other operators because they just get offered more money wherever they go."
 
For Shell's Bichsel, who spends $60 billion every year of his owns company's money and that of its project partners on contracting and procurement, there is one more tool in the cost-saving toolbox.
 
"One of the best mitigants is not to follow the herd and don't go where there is a big boom starting," he said. "It helps to know where the shortages of labour or materials could occur." - Reuters



Tags: Oil | Drilling | gas | factory | Rig |

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